February 2015

Don’t Take The High Road!

         I recently met with an older couple who were interested in how best to distribute their estate when they are both gone. During our conversation, I learned that they have one married daughter who, in their own words, has a pretty level head when it comes to managing money.  However, they had some concerns about their son-in-law and his not so level head when it comes to money management. In addition, he has a difficult time holding down a job for more than a year or two.  The daughter and her husband have two young children.

Although they perceive their daughter’s marriage to be strong, they were concerned that when it came to matters of money she would give in to her husband’s whims and sooner or later the inheritance would be gone. They wanted to know what their options were.
First of all I applauded this couple for really thinking about the “what ifs” in the distribution of their estates. Many people we meet just take the high road –“All outright- it’s only fair. Whatever happens with the inheritance happens!” Rather than leaving their entire estates outright to their daughter, I suggested they distribute 25% of their estates outright to their daughter immediately upon the death of the survivor of the couple. I suggested that with the remaining 75% they establish a Trust for the daughter’s benefit as follows. Upon the 5th anniversary of their deaths, one-third of this trust will be distributed outright to the daughter.  Whatever remains in the trust will be held in trust for the remainder of her lifetime. During her lifetime, she is entitled to income, and could request principal distributions from the trust for—education, major emergencies, day-to-day expenses, or, whatever is in line with the trust created by her parents.
As trustee we provide the investment management as well as financial guidance remaining true to the intent of the trust.  Lastly, upon the death of their daughter or should she predecease, the couple can make their grandchildren the beneficiaries of the trust.  This assures that their estates will remain with their bloodline. As always, I suggested that this couple secures the services of an elder law attorney to draft
their new wills.

Hoping warmer weather is just around the corner.



Who is Giving to Charity?

 The Chronicle of Philanthropy conducted study of changes in charitable giving efforts resulting from the Great Recession.  The results were somewhat unexpected.
• From 2006 though 2012, the charitable gifts of those who earn more than $200,000 annually soared, even after taking inflation into account.  In 2012 they donated an aggregate $77.5 billion. However, during that period this group saw their income rise even faster.  Thus, as a percentage of adjusted gross income, this group’s giving declined by 4.6%.
• Those making less than $100,000, in contrast, increased their generosity by 4.5% during this period (as a percentage of their adjusted gross income), with aggregate gifts of $57.3 billion.
• Giving rates ranged from a high of 6.56% of AGI for Utah to a low of 1.74% for New Hampshire.
• The most generous “blue” state, meaning a state that voted for Barak Obama in the 2012 election, was Florida, with a giving rate of 3.22%.  Florida came in 18th in the ranking; the top 17 states all voted for Mitt Romney.
• Despite its oil boom, North Dakota saw a 16% drop in the rate of giving, falling to 2.37% of AGI.  That was the largest drop in effort of any state.
• Nine of the 10 large cities with the highest giving rates are in the Sun Belt, with Salt Lake City leading the way.
• Itemizers claimed total charitable deductions of $180 billion in 2012, roughly 3% of total income.  The median income of those who itemized was $83,823, and the median charitable contribution was $3,176.
Caveat: These findings are based entirely upon those who itemized their tax deductions, as they are based upon tax filing data.  A great many charitable gifts never get reported to the IRS, as even affluent families may decide to use the standard deduction instead of itemizing.  What’s more, this study could not have picked up any charitable IRA rollovers, as such transfers don’t get reported on Form 1040.

Women and Social Security

Social Security benefits are gender neutral. They are based only upon work history. A man and a woman with identical work histories will have identical Social Security benefits.
In actuarial terms, this confers a small but important extra benefit on women as a group, because they live longer than do men.  They will collect more in benefits over the course of retirement than will men.  The Social Security Administration reports that 56.0% of beneficiaries age 62 and up are women, and 66.7% of those over 85 are women.
On the other hand, the average Social Security benefit for women is lower than it is for men, because both their years of coverage and their lifetime taxable compensation tend to be less.  In 2012 the average annual Social Security income received by women 65 years and older was $12,520, compared to $16,398 for men.  What’s more, studies show that single retired women, including both widows and the never-married, are more reliant upon Social Security for their retirement income. For this group, Social Security benefits provide about half of their income, compared with about 36% for elderly men and 30% for elderly couples.
The shortfall has led to some calls for a rethinking of the benefit structure.  Last December, at a Senate Finance Committee meeting on the subject of working women and Social Security, Senator Ron Wyden (D-Ore.) called for changes in the way that benefits are calculated for surviving spouses and closing of the gap between benefits received by disabled elderly and other disability beneficiaries. Wyden also recommended the creation of “caregiver credits” for those who have to leave the paid labor force to care for children or disabled family members.  If such credits were offered, being a caregiver would no longer have a negative impact on earning a Social Security benefit.

Chart your own course

Whether or not changes are made to Social Security benefits, women—and men!—need to take steps to maximize their retirement capital. That means saving as much as possible in employer-sponsored retirement savings programs, such as 401(k) plans and 403(b) plans. Contributions of up to $18,000 are permitted for these plans in 2015. Additional “catch-up” contributions of up to $6,000 are permitted for those 50 and over, who are closing in on their retirement start date.
Don’t overlook the opportunity to contribute to an IRA or a Roth IRA, up to $5,500 ($6,500 for those over age 50).  Having a substantial capital base to rely on for retirement income will dramatically improve retirement financial security.


Risks of Amateur Trustees
More and more affluent families are turning to trust-based solutions for their wealth management and inheritance problems. However, a trust is only as good as its trustee. Have you been asked to serve as trustee, perhaps for a parent’s trust? Do you plan to ask your child to be your trustee?  Although such a course of action may be a natural impulse, it may not be the best approach.
A family member has the advantage of personal understanding of the trust beneficiaries, and that is no small thing. Unfortunately, family members usually lack experience and ability in several other crucial areas.

Amateur trustees—watch out for these traps

There are many ways for a trustee to fail to meet the obligations of sound trust management.
Faulty records.  There’s much more to trust accounting than balancing checking accounts and keeping track of portfolio statements.  Income, asset values and distributions must be reported to the beneficiaries on a regular basis.  “Beneficiaries” refers not only to those who receive current trust income, but also to those who will receive the assets when the trust terminates.  We suggest a team approach, including a trust attorney, a tax professional and an investment manager. Note: We are pleased to serve as agent for a trustee!
Failure to diversify.  Laws governing the prudent investment of trust assets vary from state to state.  In general, concentration of assets should be avoided.  According to many experts, a red flag should go up when any one holding accounts for more than 10% of a trust.  Problems with that holding could lead to lawsuits by disgruntled beneficiaries against the trustee.  On the other hand, the person who creates a trust may override the diversification requirements. For example, shares in a family business could be exempted from the diversification mandate.
Biased distributions.  One of the most important benefits of trust-based wealth management is delivery of financial resources to multiple generations, today and in the future. Trouble is, finding the appropriate balance between current and future interests is not easy.  Trustees need to document reasons for allowing or denying invasion of a trust for particular beneficiaries, for example. What’s more, the investment strategy chosen for a trust may inadvertently favor some beneficiaries over others.  When a family member is a trustee, the issue of bias can become quite emotional.
Expecting a payday.  Trustees should be paid, but beneficiaries don’t always see it that way.  When the trustee is a family member with an interest in the trust, the payment issues can be especially sensitive. Compensation matters should be settled before the trustee assumes the duties of trust management.
False sense of safety.  Some amateur trustees assume that, given their relationships to the family and trust beneficiaries, their work won’t be scrutinized closely.  Not so.  The role of trustee has potentially unlimited liability.  Trustees may be called to account for their investment choices, as well as for the quality of their fiduciary judgments about trust distributions.

Consider the professional alternative as your trustee

Given the complexities of modern trust management, one would expect that businesses, such as trust companies and bank trust divisions, would become available to meet the need. One would be absolutely correct! That’s us!
Key qualifications that we bring to the table:
• Integrity. The single most important qualification for any trustee is … trustworthiness.  A trustee must live up to standards higher than those that prevail in everyday business.
Investment experience. A trustee may be called upon to consider the current income needs of a surviving spouse and the capital growth needs of two children who face heavy education expenses in years to come, and then to come up with an investment program that does justice to both requirements.
Administrative know-how.  A trustee must make sure that trust assets are properly titled and safeguarded, collect income and distribute or reinvest it as the terms of the trust direct, and perform any number of other chores.
Tax and accounting capabilities. A trustee must be aware of federal and state tax requirements, keep detailed, accurate records, and submit timely reports to beneficiaries.
People skills. The ability to serve as a trustworthy financial advisor, both for the individuals who create trusts and the beneficiaries that they name, may not be a formal requirement of trusteeship, but it’s important nonetheless.
We offer you our technical skills and our financial and auditing infrastructure for the successful implementation of your trust plan.  Most importantly, we offer you our experience as trustee.  It’s a truism that every wealthy family is different, and so is every trust plan. Yet all trust management is governed by the legal standards of fiduciary duty.  We’ve seen a range of family circumstances, of market environments, of trust purposes and objectives.  We invite you to put our experience to work for you and your family.

Shall we discuss your needs?

We invite you to learn more about our capabilities as trustee for your family. You may designate us to serve as sole trustee, or as cotrustee along with family members. Call on us to discuss the possibilities.

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